The unemployment rate isn’t 42%: an introduction to the most commonly cited economic statistic
By /u/papermarioguy02, original here On the campaign trail, now President Donald Trump claimed the unemployment rate was 42%. This, as one might guess, is patently false. But given that the unemployment rate is probably the most cited economic figure in politics (at least since 2008), it’s probably good to know how it’s calculated and what it even means. A note that this will just focus on the US unemployment rate, but the basic principles stay the same from nation to nation even as the particulars change. What the hell does unemployment mean anyway? The official unemployment rate as reported by the Bureau of Labor Statistics (BLS) also known as U-3 (which is as of writing 4.4%) is what people are talking about when they mention the unemployment rate. This calculation is based of the current population survey. A survey of about 60000 households by BLS. If you wanted to dispute the unemployment rate I suppose you could say this survey is fake news or something, but no one thinks this. The population survey is split into three groups: employed, (full-time and part-time workers, people on holiday or sick leave, and people who do unpaid work for a family business are also counted) unemployed, and not in the labor force. The not in the labor force part is where the confusion comes in so I’ll try to explain it as best I can. You are considered unemployed if you: do not have a job, are available for work, and have looked for work in the last four weeks. If you do not fit into either employed or unemployed you are classified as not in the labor force. The unemployment rate is the percentage of people in the labor force that are unemployed. The labor force participation rate is the percent of people 16 or older that are either employed or unemployed. That number’s a big enough deal that it’s another post in and of itself.* *So I think where Trump got his 42% unemployment number was that he took the labor force participation rate (around 62%) and subtracted the unemployment rate, (around 5% of that 62% at the time) and it popped out 58% (100-58=42% “unemployment”). You don’t have to be a genius to figure out the imense problems with that method (apparently all retirees count as unemployed now) but suffice it to say it’s this. Other calculations Maybe you have a problem with U-3’s definition of unemployed, well do I have good news for you! The official unemployment rate is only one of six different unemployment calculations with increasing levels of inclusivity. Let’s list them: * U-1: People who are unemployed for 15 weeks or longer (useful for figuring out structural unemployment which I will get to). * U-2: Job losers (laid off, not fired or quitting) and temp work completers. * U-3: The official unemployment rate. * U-4: U-3 plus “discouraged workers” people who want a job and have looked for o * ne in the last year, but aren’t looking for one now because they don’t like the job market. * U-5: U-4 + “marginally attached workers” who are discouraged workers except they aren’t looking for a job now for reasons other than the market. * U-6: U-5 + part-time workers who would like to be full-time but can’t for economic reasons. That was a lot of technicalities, but I think it’s necessary to know all of those permutations of unemployment because people will try to pick the ones that support their viewpoint the most, knowing them all also gives you a bit of a look at the different parts of the labor force and reasons people aren’t in it. This concludes the part of the post on what the unemployment rate is. From here I’ll try to talk more about what it means. If you just want to know about the numbers, skip to the end of the post. If you want to learn the economics behind it though: Why does unemployment do? Is an unemployment rate of 0% possible in the US? No, the reasoning for this is that there’s always going to be some frictional unemployment that is, unem ployment caused by people going between jobs. This type isn’t too worrying because most of the time it’s short-term (less than a few months). Plus it can be fought with fairly straightforward policies like government job boards, and businesses want to help make it lower (they want qualified people working for them after all). Now the second type of unemployment is the nastier and more long-term kind, structural unemployment is when at the current wage for workers there are more people who want to work than companies who can afford to hire them. This can be shown as a wage above equilibrium levels causing a surplus in labor (that is unemployment). The reasons for this above equilibrium wage might be, a recession causing demand for labor to go down, minimum wage laws (which aren’t necessarily a bad thing either), not wanting to piss off unions (which isn’t necessarily a bad thing either), increased overseas competition and an influx of new workers (those last two only affect small localised markets because new workers create demand for jobs in other industries and trade allows countries to specialize in markets they have a comparative advantage in). At any given time most people unemployed are going to be structurally so, but in total over say, a year most of the people that ended up unemployed frictionally due to the fact that they find a job quicker. The ways to combat structural unemployment are way past the scope of this post, but just know that there are different types of unemployment and what causes them. Additional Reading Greg Mankiw’s Principles of Economics. It’s great and if you don’t already have an economics background, you should read it. It really gives a great entry point to understand the more complex economics material one runs into while discussing politics. The Federal Reserve Economics Database from the St. Louis Fed. It’s an amazing database with graphs of basically anything the someone who doesn;t work in the field would ever want to know about US economics figures. For instance they have charts for U-1, 2, 3, 4, 5, and 6. Wikipedia. You’ve heard of it. But it really worked as a nice way to double check I wasn’t full of shit while writing this.